Quick GK Inputs

Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
 Quick GK Inputs
Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
CAD and fiscal deficit
CAD: Occurs when a country's total import of
goods, services and transfers is greater than
the country's total export of goods, services
and transfers. This situation makes a country a
net debtor to the rest of the world. The
current account refers to one part of a
nation’s balance of payments accounts ‐ a
record of all international financial
transactions with other countries.
Fiscal deficit: When a government's total
expenditures exceed the revenue that it
generates (excluding money from borrowings).

Deficit differs from debt, which is an

accumulation of yearly deficits.
Causes of rise in CAD

a. Increase in imports
b. External factors
c. When domestic output falls

Causes of rise in fiscal deficit

a. higher government spending

b. a reduction in tax revenues
 Quick GK Inputs
Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
Gold imports in India

India is the world's largest importer of gold

and biggest consumer of gold jewellery.
Reasons to import
1. Gold is seen by many Indians as an
investment for the future.
2. RBI imports gold to maintain gold
reserves. These reserves ensure security
at the time of crises and war.
 Trends
1. India produces only around 3 tonnes of gold
per annum and imports around 800 tonnes
of gold.
2. Gold imports accounted for almost three‐
fourths of current account deficit (CAD). CAD
that was 5.4% in third quarter 2012 is bound
to rise this year. To be respectable in
sovereign rating, a country's CAD should be
less than 3%.
3. Gold returns have been around 22%; higher
than those of the Nifty, one‐year bank
deposits and 10‐year‐government bonds over
the last few years.
 The scenario
1. Justifying government's concerns over climbing gold imports, India's
fiscal deficit widened to Rs.4.07 lakh crore (around $76 billion) in the
first three quarters of the current financial year.
2. The deficit during April‐December period is almost 79 percent of the
budgetary estimate of Rs.5.14 lakh crore for the entire financial year
ending March 31, 2013.
3. As the government struggles to rein in a raging current account deficit
that is likely to cross 4% of the national economic output this fiscal, it has
increased the import duty on the precious metal thrice since last year.
4. India’s gold imports, next only to oil imports in terms of value, were
responsible for a current account deficit of 4.2% of the gross domestic
product in 2011‐12, a 30‐year high.
5. The increase in import duty on gold has clearly led to a price differential
between Indian and international gold, and that, in turn, has led to an
increase in smuggling.
6. After restrictions were lifted on gold imports and a few commercial banks
were allowed to import gold and sell the yellow metal to jewellers and
exporters in 1997, the spread between international and local market
prices shrank dramatically, but with the rise in import duty, it is now
widening.
 Recent measures

The government hiked the import duty on gold from

4 to 6 per cent. The government also announced its
decision to link the Gold ETFs (Exchange Traded
Funds) with Gold Deposit schemes as a measure to
increase the supply of physical gold in the market
without resorting to imports. It is a short‐term
solution. In the medium‐ to long‐term, consumers
will come back
India has told Thailand that it will impose six‐10 per cent duty on gold jewellery
imports in the proposed free trade agreement ( FTA), according commerce ministry
sources. The move is aimed at curbing a spurt in gold jewellery imports in recent
times, which may rise further as the government raises Customs duty on gold imports.
However, the commerce ministry has ruled out a total ban on gold imports from
Thailand.

Imports of gold jewellery from Thailand are not a major cause of widening India’s
current account deficit (CAD) as these stand at a mere 0.02 per cent of overall gold
imports into the country. However, the government is worried it may surge after the
hike in Customs duty on gold. Notably, gold jewellery imports from Thailand saw a huge
jump in the first eight months of the current financial year, particularly in October and
November after the government announced hike in Customs duty. If the trend persists,
this may not only widen India’s CAD, but may also put domestic jewellers at a
disadvantageous position

Currently, India has early harvest scheme (EHS) with Thailand under which gold
jewellery is imported at zero per cent since 2004. This concession is available only if
there is minimum 20 per cent value addition in jewellery in Thailand before coming to
India

India cannot increase duty on import of gold jewellery under EHS and has to depend on
the proposed FTA. “Now that the government has frozen the rate under EHS, it will not
be able to re‐impose the duty. To do that, they will have to restart the negotiations
from the beginning under FTA talks, said Ajay Sahai, director‐general, Federation of
Indian Export Organisations ( FIEO).
In the first nine months of FY13, gold imports declined 15
per cent to stand at $38 billion. Gold and oil imports were
the prime reasons for widening India’s CAD to a record 5.4
per cent of GDP in the second quarter of FY13. While oil
imports cannot be curtailed beyond extent, the government
is trying hard to curb import of gold. Earlier this month, the
government had increased Customs duty on standard gold
bars by two percentage points to six per cent to cut down
imports of the precious metal into the country.

In January 2012, basic Customs duty was increased from Rs

300 per 10 gram to an ad valorem rate of two per cent on
standard gold bars and on non‐standard gold bars to five per
cent. Further, in the Budget in March 2012, it was doubled
to four per cent and 10 per cent, respectively.
 Quick GK Inputs
Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
2 G spectrum scam
1. The 2G spectrum scam involved politicians and government officials
in India illegally undercharging mobile telephony companies for
frequency allocation licenses, which they would then use to create
2G subscriptions for cell phones.
2. There were varied accounts of government losing Rs.176646 crore
(CAG, based on 3G and BWA spectrum auction prices 2010), Rs.30,984
crore (CBI), gaining over Rs.3000crore (TRAI) and “zero loss” (Kapil
Sibal, the then Minister for Communication &IT).
3. the Supreme Court on 2 February 2012 quashed 122 licences
awarded in 2008, stating them to be unconstitutional. As per its
directions, the government revised the base price for 5 MHz 2 G
spectrum auction to Rs.14000 crore, the value of spectrum becoming
around Rs,2800 crore per MHz, almost agreeing with the CAG’s
estimate of Rs..3500crore per MHz.
1. The original plan was to award licences on first‐come‐first‐served basis. A.Raja,
the then Minister for Communications &IT, manipulated to favour a select group of
companies.
2. On 10 January 2008, companies were given only a few hours to provide their
Letters of Intents and cheques, while those favoured companies were tipped off
to be ready with these documents, ahead of others and thus won the licences.
3. Persons involved in the scam were:

Politicians: A Raja, MK Kanimozhi, late Pramod Mahajan

Bureaucrats: Siddhartha Behura, RKChandolia
Corporate executives: Sanjay Chandra (Unitech Wireless), Gautam Doshi (Reliance
ADAG), Hari Nair (Reliance ADAG), Surendra Pipara (Reliance ADAG), Vinod Goenka
(DB Realty and Swan Telecom), Shahid Balwa (DB Realty and Swan Telecom), Asif
Balwa (Kusegaon fruits &vegetables), Rajiv Agrawal (Kusegaon fruits &vegetables),
Sharath Kumar (Kalaignar TV), Ravi Ruia (Essar Group), Anshuman Ruia (Essar
Group), Vikas Saraf (Essar Group),IP Khaitan (Loop Telecom), Kiran Khaitan (Loop
Telecom), Karim Morani (Cineyug Films)
Corporations: Unitech Wireless, Reliance Telecom, Swan Telecom
Media Persons: Barkha Dutt (NDTV), Veer Sanghvi (The Hindustan Times), who
were in connivance with the corporate lobbyist Nira Radia, in influencing the
decisions of the telecom ministry.
 Quick GK Inputs
Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
Inflation in India and steps taken to control it
1. In India, inflation is calculated on a weekly basis. India uses the
Wholesale Price Index (WPI) to calculate and then decide the
inflation rate in the economy.
2. WPI was first published in 1902, and was one of the more
economic indicators available to policy makers until it was
replaced by most developed countries by the Consumer Price
Index in the 1970s. WPI is the index that is used to measure the
change in the average price level of goods traded in wholesale
market.
3. In India, a total of 435 commodities data on price level is tracked
through WPI, which is an indicator of movement in prices of
commodities in all trade and transactions. It is also the price index
which is available on a weekly basis with the shortest possible
time lag only two weeks. The Indian government has taken WPI as
an indicator of the rate of inflation in the economy.
4. Present Rate of Inflation in India: 7.18% as on December 2012.
5. The Monetary and Credit Policy is the policy statement,
traditionally announced twice a year, through which the Reserve
Bank of India seeks to ensure price stability for the economy.
6. These factors include ‐ money supply, interest rates and the
inflation. In banking and economic terms money supply is referred
to as M3 ‐ which indicates the level (stock) of legal currency in the
economy.
7. Besides, the RBI also announces norms for the banking and
financial sector and the institutions which are governed by it.
These would be banks, financial institutions, non‐banking
financial institutions, Nidhis and primary dealers (money markets)
and dealers in the foreign exchange (forex) market.
8. The different rates/tools used in monetary policy to control
inflation used by RBI are explained below:
1. CRR(Cash Reserve Ratio):Cash reserve Ratio (CRR) is the amount of
Cash(liquid cash like gold) that the banks have to keep with RBI.
This Ratio is basically to secure solvency of the bank and to drain
out the excessive money from the banks. If RBI decides to increase
the percent of this, the available amount with the banks comes
down and if RBI reduce the CRR then available amount with Banks
increased and they are able to lend more.

Present CRR is (4% with effect from 09‐02‐2013, as announced on

29‐01‐2013)

2. SLR((Statutory Liquidity Ratio) is the amount a commercial bank

needs to maintain in the form of cash, or gold or govt. approved
securities (Bonds) before providing credit to its customers. SLR
rate is determined and maintained by the RBI (Reserve Bank of
India) in order to control the expansion of bank credit.Generally
this mandatory ration is complied by investing in Govtbonds.

Present SLR is 23 %.as of 11‐08‐2012

3. Repo Rate: Whenever the banks have any shortage of funds they
can borrow it from RBI. Repo rate is the rate at which our banks
borrow rupees from RBI. A reduction in the repo rate will help
banks to get money at a cheaper rate. When the repo rate
increases borrowing from RBI becomes more expensive.

Present Repo Rate: 7.75 % as of 29‐01‐2013

4. Reverse Repo rate: Reverse Repo rate is the rate at which Reserve
Bank of India (RBI) borrows money from banks. Banks are always
ready to lend money to RBI since their money are in safe hands
with a good interest. An increase in Reverse repo rate can cause
the banks to transfer more funds to RBI due to this attractive
interest rates. It can cause the money to be drawn out of the
banking system.

Present Reverse Repo Rate: 6.75% as of 29‐01‐2013

5. Bank Rate: Bank Rate is the rate at which RBI allows finance to
commercial banks. Bank Rate is a tool, which central bank uses
for short‐term purposes. Any upward revision in Bank Rate by
central bank is an indication that banks should also increase
deposit rates as well as Base Rate/ Benchmark Prime Lending
Rate(BPLR). Thus any revision in the Bank rate indicates that it is
likely that interest rates on your deposits are likely to either go
up or go down, and it can also indicate an increase or decrease
in your EMI.

Present Bank Rate: 8.75 % as of 29‐01‐2013

 Quick GK Inputs
Feb 2013
1. CAD and Fiscal Deficit
2. The Gold imports issue
3. 2G scam
4. Inflation in India
5. The US fiscal cliff
The US Fiscal cliff
1. The fiscal cliff was the sharp decline in the budget deficit
that could have occurred beginning in 2013.The deficit
was projected to be reduced by roughly half in 2013.
2. This was due to increased taxes and reduced spending, as
required by previously enacted laws.
3. The Congressional Budget Office (CBO) had estimated
that the fiscal cliff would have likely led to a mild
recession with higher unemployment in 2013, followed
by strengthening in the labor market with increased
economic growth.
4. Instead, the American Taxpayer Relief Act of 2012 largely
eliminated the fiscal cliff with a higher deficit and a
smaller revenue increase compared to the previously
enacted laws.
5. Intense debate and media coverage about the fiscal cliff
drew widespread public attention during the end of 2012
because of its projected short‐term fiscal and economic
impact.
6. The American Taxpayer Relief Act of 2012 was signed into
law by President Barack Obama on January 2, 2013 and
eliminated much of the tax side of the fiscal cliff, with
the CBO projecting an 8.13% increase in revenue and
1.15% increase in spending for fiscal year 2013.
7. The House passed the bill without amendments by a
margin of 257–167on January 1, 2013 and President
Barack Obama signed it the next day.